Objective information about retirement, financial planning and investments

 

Am I on Track for Retirement?

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Financial advisors are frequently asked some version of the question “Can I Retire?”  The Employee Benefit Research Institute (EBRI) recently released its 2018 Retirement Confidence Survey. The latest survey offered several key findings:

  • Only 32% of retirees surveyed felt confident that they will be able to live comfortably throughout their retirement.
  • Retiree confidence in their ability to over basic expenses and medical expenses in retirement dropped from 2017 levels.
  • Less than one-half of the retirees surveyed felt confident that Medicare and Social Security would be able to maintain benefits at current levels.

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It is essential that Baby Boomers and others approaching retirement take a hard look at their retirement readiness to determine any gaps between the financial resources available to them and their desired lifestyle in retirement. Ask yourself a few questions to determine if you can retire.

What kind of lifestyle do you want in retirement?

You’ll find general rules of thumb indicating you need anywhere from 70% to more than 100% of your pre-retirement income during retirement. Look at your individual circumstances and what you plan to do in retirement.

  • Will your mortgage be paid off?
  • Do you plan to travel?
  • Will you live in an area with a relatively high or low cost of living?
  • What’s your plan to cover the cost of healthcare in retirement?

Remember spending during retirement is not uniform. You will likely be more active earlier in your retirement.  Though you may spend less on activities as you age, it is likely that your medical costs will increase as you age.

How much can you expect from Social Security?

Social Security benefits were never designed to be the sole source of retirement income, but they are still a valuable source of retirement income. Those with lower incomes will find that Social Security replaces a higher percentage of their pre-retirement income than those with higher incomes.

Recent news stories indicating that the Social Security trust fund is in trouble is not welcome news for those nearing retirement or for current retirees.

What other sources of retirement income will you have?

Other potential sources of retirement income might include a defined-benefit pension plan; individual retirement accounts (IRAs); your 401(k) plan, and your spouse’s employer-sponsored retirement plans. If you have other investments, it is important to have a strategy that maximizes these assets for your retirement.

If you are fortunate enough to be covered by a workplace pension, be sure to understand how much you will receive at various ages.  Look at your options in terms of survivor benefits should you predecease your spouse.  If you have the option to take a lump-sum distribution it might make sense to roll this over to an IRA.  Also determine if your employer offers any sort of insurance coverage for retirees. 

Where does this leave me? 

At this point let’s take a look at where you are.  We’ll assume that you’ve determined that you will need $100,000 per year to cover your retirement needs on a gross (before taxes are paid) basis.  Let’s also assume that your combined Social Security will be $30,000 per year and that there will be $20,000 in pension income.  The retirement gap is:

Amount Needed

$100,000

Social Security

30,000

Pension

20,000

Gap to be filled from other sources

$50,000

 

Where will this $50,000 come from?  The most likely source is your retirement savings.  This might include 401(k)s, IRAs, taxable accounts, self-employment retirement accounts, the sale of a business, and inheritance, earnings during retirement, or other sources. 

To generate $50,000 per year you would likely need a lump sum in the range of $1.25 – $1.67 million at retirement.

Everybody’s circumstances are different.  Many retirees do not have a pension plan available to them, some don’t have a 401(k) either.

Look at where you stand and take action 

Some steps to consider if you feel you are behind in your retirement savings:

  • Save as much as possible in your 401(k) or other workplace retirement plan while you are still employed
  • Contribute to an IRA
  • If you are self-employed start a retirement plan for yourself
  • Keep your spending in check
  • Scale back on your retirement lifestyle if needed
  • Plan to delay your retirement or to work part-time during retirement

Providing for a comfortable retirement takes planning. Don’t be lulled into thinking your 401(k) plan alone will be enough. If you haven’t put together a financial plan, don’t be afraid to enlist the aid of a professional if you need help.

Approaching retirement and want another opinion on where you stand? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for more detailed advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if its right for you. Financial coaching focuses on providing education and mentoring regarding the financial transition to retirement.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

Photo credit:  Wikipedia

A Pre-Retirement Financial Checklist

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Are you within a few years of retirement? It’s time to get your financial house in order. We are now almost eight years into a bull market for stocks that has seen the S&P 500 move from 677 at the lows of the financial crises to a recent intraday high of over 2,350. Hopefully these stock market highs have favorably impacted your retirement readiness?

Here are several items to include on your pre-retirement financial checklist.

Review your company benefits  

Your 401(k) plan might be your largest and most significant employee benefit, but there may be others to consider as well. Does your company offer any sort of retiree medical coverage? Are there other benefits that you can continue at reduced group rates?

In the case of your 401(k) you will have choices to make at retirement. You will need to determine if you want to leave it with your soon-to-be-former employer, roll it into an IRA, or take a distribution. The last choice will likely result in a hefty tax bill, so this is generally not a good idea for most folks.

Do you have company stock options that you haven’t exercised? Check the rules here. Speaking of company stock, there are special rules called net unrealized appreciation to consider when dealing with company stock held in your 401(k) plan.

Do you have a pension from your current or former employer?

While a pension is certainly an employee benefit, I feel that it deserves its own section. You might have several decisions to make regarding your pension benefit if you are fortunate enough to be covered by one.

  • Do you take the benefit immediately upon retirement, or wait?
  • If you have the option, do you take the pension as a lump-sum and roll over to an IRA or take it as a monthly annuity?
  • Generally, there will be several annuity payment options to consider, which one is right for your situation?

These decisions should be made in the context of your overall financial situation and your ability to effectively manage a lump sum. Since any lump-sum would be taxable if taken as a distribution, it is usually advisable for you to roll it over into a tax-deferred account such as an IRA. If you have earned a pension benefit from a former employer, be sure to contact your old company to get all the details and to make sure they have your current address and contact information so there are no delays or glitches when you want to start drawing on this pension.

Determine your Social Security benefits and when to take them

While you can start taking Social Security at age 62, there is a significant reduction in your monthly benefit as opposed to waiting until your full retirement age. Further, if you can wait until age 70 your benefit level continues to grow. If you are married the planning should involve both spouses’ benefits. There are several planning opportunities for married couples around when each spouse should claim their benefit.

Review your retirement financial resources 

Over the course of your working life you have likely accumulated a variety of investments and other assets that can be used to fund your retirement which might include:

  • Your 401(k)or similar retirement plan such as a 403(b) or other defined contribution plan.
  • IRA accounts, both traditional and Roth.
  • A pension.
  • Stock options or restricted stock units.
  • Social Security
  • Taxable investment accounts.
  • Cash, savings accounts, CDs, etc.
  • Annuities
  • Cash value in a life insurance policy
  • Inheritance
  • Interest in a business
  • Real estate
  • Any income from working into retirement

In the years prior to retirement it is a good idea to review all your anticipated assets and retirement resources to determine how they can be best utilized to support your desired retirement lifestyle.

Determine how much you will need to support your retirement lifestyle 

While this might seem intuitive you’d be surprised how many folks within a few years of retirement haven’t done this. Basically, you will want to put together a budget. Will you stay in your home or downsize? What activities will you engage in? What will your basic living expenses be? And so on.

Compare this to the income that your various retirement resources might generate for you and you will have a good idea if you will be able to support your desired lifestyle in retirement. If there is a gap, you still have some time to make adjustments to close that gap.

You will need to do some planning in terms of which financial resources to tap and the sequencing of these withdrawals over the course of your retirement.

This is a very cursory “checklist” for Baby Boomers and others within a few years of retirement. This might be a good point to engage the services of a fee-only financial advisor if you’ve never done a financial plan, or if your plan is out of date. Retirement can be a great time of life, but proper planning is required to help ensure your financial success.

Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if its right for you. Financial coaching focuses on providing education and mentoring in two areas: the financial transition to retirement or small business financial coaching.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

Should You Accept a Pension Buyout Offer?

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Corporate pension buyout offers have been in the news in recent years with companies like Hartford Financial Services offering lump-sum payment options to vested former employees and with Boeing offering a choice of lump-sum or annuity payments to a similar group. Note these offers are not available to retirees who have already taken their pension benefit.

The answer to the question of whether you should accept a pension buyout offer versus taking your pension as a lifetime stream of monthly payments is that it depends upon your situation. Here are a few things to consider.

Are they sweetening the deal? 

Perhaps the lump-sum is a bit larger, and in the case of the Boeing offer the annuity payments were a bit better as well. Or perhaps there normally wouldn’t be a lump-sum option available from the pension plan so this in and of itself is an incentive.

Remember the incentive for the companies offering these deals is to get rid of these future pension liabilities. The potential cost savings and impact on their future profitability is huge. 

Can you manage the lump-sum? 

The decision to take your pension as a lump-sum vs. a stream of payments is always a tough decision. A key question to ask yourself is whether you are equipped to manage a lump-sum payment. Ideally you would be rolling this lump-sum into an IRA account and investing it for your retirement. Are you comfortable managing this money?  If not are you working with a trusted financial advisor who can help you?

There has been much written about financial advisors who troll large organizations (both governmental and corporate) looking for large numbers of folks with lump-sums to rollover. In some cases, these advisors have moved this rollover money into investments that are wholly inappropriate for these investors. As always be smart with your money and with your trust.  Be informed and ask lots of questions.

Do you have concerns about the company’s financial health? 

Do you have doubts about the future solvency of the organization offering the pension? This pertains to both a public entity (can you say Detroit?) and to for-profit organizations like Hartford Financial and Boeing. In the latter case pension payments are guaranteed up to certain monthly limits set by the PBGC. If you were a high-earner and your monthly payment exceeds this limit you could see your monthly payment reduced.

While I am not familiar with the financial state of either Hartford Financial or Boeing I’m guessing their financial health is not a major issue. If you receive a buyout offer you might consider taking it if you have concerns that your current or former employer may run into financial difficulties down the road.

Who guarantees the annuity payments? 

If the buyout offer includes an option to receive annuity payments make sure that you understand who is guaranteeing these payments. Generally, if a company is making this type of offer they are looking to reduce their future pension liability and they will transfer your pension obligation to an insurance company. They will be the one’s making the annuity payments and ultimately guaranteeing these payments.

This is not necessarily a bad thing but you need to understand that your current or former employer is not behind these payments nor is the PBCG. Typically, if an insurance company defaults on its obligations your recourse is via the appropriate state insurance department. The rules as to how much of an annuity payment is covered will vary.

The impact of inflation

An additional consideration in evaluating a buy-out option that includes annuity payments of this type is the fact that most of these annuities will not include cost of living increases. This means that the buying power of these payments will decrease over time due to inflation. 

What other retirement resources do you have? 

If you will be eligible for Social Security and/or have other pension plans it quite possibly will make sense to take a buyout offer that includes a lump-sum. Review all of your retirement accounts and those of your spouse if you are married.  This includes 401(k) plans, 403(b) accounts, IRAs, etc. This is a good time to take stock of your retirement readiness and perhaps even to do a financial plan if don’t have a current one in place.

The Bottom Line

I’m generally a fan of pension buyout offers, especially if there is a lump-sum option. As with any financial decision it is wise to look at your entire retirement and financial situation and to have a plan in place to manage this money.  Where an annuity is also available you need to understand who will be behind the annuity and to analyze whether this is a good deal for you. Be prepared to deal with an offer if you receive one.

Were you offered a buyout or early retirement package? Do you need some help evaluating it? Do you need an independent opinion on your investments and where you stand in terms of retirement? Check out my Financial Review/Second Opinion for Individuals service. 

NEW SERVICE – Financial Coaching. Check out this new service to see if it’s right for you. Financial coaching focuses on providing education and mentoring on the financial transition to retirement.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

Social Security-The End of the File and Suspend Couples Strategy

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The big news in the world of retirement planning is end of a lucrative couples Social Security claiming strategy, file and suspend with a restricted application. The ability take advantage of this lucrative option comes to an end as of April 30, 2016 thanks to the passage of the Bipartisan Budget Bill of 2015.

Social Security-The End of the File and Suspend Couples Strategy

What is the file and suspend strategy?

Under this strategy spouse A upon reaching their full retirement age (FRA) would file for their benefit and then suspend it. They would accrue delayed credits at 8% per year out to age 70 (or sooner) at which time they would resume taking their benefit.

Once spouse B reached their FRA they would then file a restricted application for benefits in order to receive a spousal benefit based upon spouse A’s earnings record. Their own benefit would continue to accrue out until age 70 at which time they would switch to their own benefit if it was higher than the spousal benefit or continue to take the spousal benefit if it was larger.

In many cases this might add an additional $60,000 in benefits to the couple over the four years between spouse B’s FRA and age 70.

There are numerous reasons to do this and it has become a popular couples claiming strategy in recent years.

This option ends as of April 30, 2016.

Who can still take advantage? 

Couples who have executed this strategy are fine and there will be no changes. Couples who are eligible to execute this strategy prior to April 30, 2016 will still be able to.

What are the implications? 

Couples who might have factored this into their retirement strategy will need to rethink their plans and their Social Security claiming strategy.

Those who advise clients nearing retirement and those who provide Social Security tools to the financial advisors will need to rethink their advice and redo some of these tools. Websites offering Social Security calculators will need to redo them as well.

If this change impacts your situation I’d urge you to consult with a knowledgeable financial advisor.

There is much more detail on this change and much has been much written on this topic by a lot of folks whose opinions and knowledge I respect. Below are some excellent articles to check out to learn more about this.

8 Questions About Social Security Claiming Strategies by Mark Miller

The Death of File & Suspend and Restricted Application by Jim Blankenship

Congress kills Social Security claiming loopholes by Alice Munnell

Social Security changes will hit couples, divorced women hard by Robert Powell

Navigating The Effective Date Deadlines For The New File-And-Suspend And Restricted Application Rules by Michael Kitces 

Congress Eliminates Two Popular (and Profitable) Social Security Claiming Strategies by Tim Mauer 

New Social Security Rules: What You Need to Know by Mike Piper 

Check out these two books on Amazon by Jim Blankenship and Mike Piper which have both been updated to reflect the new rules (note these are affiliate links and I earn a small fee if you purchase at no extra cost to you)

In addition here are two pieces on the topic that I recently wrote for Investopedia:

Social Security File and Suspend to End: How to Adjust

Social Security File and Suspend Claiming Strategy is Ending: Now What?

The Bottom Line 

The popular couples Social Security claiming strategy, file and suspend with a restricted application is coming to an end as of April 30, 2016. This is a game-changer for a lot of couples. This may be the time to seek out a knowledgeable financial advisor to advise you. Also stay tuned as there will undoubtedly be much more written on this topic moving forward.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email.

Discover the Secret to Living Tax-Free in Retirement

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On those rare occasions that I develop writer’s block in terms of what to write about here the financial services industry seems to bail me out. Case in point the invitation to a “Private Taxation Workshop” (versus just a plain old seminar) I recently received in the mail. The title of the seminar on the invitation was title I used for this article.

Think about the words “secret to living tax-free in retirement” and while doing so make sure you know where your wallet is.

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Look I’m not saying the accounting firm who is conducting the session in conjunction with a financial services firm is anything but above-board but when I hear words like living tax-free in retirement my first thought is that there will be someone telling you that purchasing the cash value life insurance policy or annuity product being peddled is the answer to your retirement anxiety.

To top this off the seminar is being held at a park district facility, not at a restaurant. In other words they aren’t even providing dinner. Those of you who are regular readers of The Chicago Financial Planner know that I do not hold the sponsors of these sessions in high regard. (Please read Investing Seminars – Should You Attend? and Should You Accept That Estate Planning Seminar Invitation? )

How to legally be in the 0% tax-bracket for any income level

This is one of the bullet points listed under the items they will be discussing at the session. Come on, really? If it were that easy wouldn’t everyone be doing it?

Again I’m guessing that there is some sort of life insurance or annuity product that will be promoted. Note nothing will be sold at the session (it says so right on the invitation) but you can be sure that if you schedule a follow-up session the hard-sell with be there right after the hand-shake. In fact you can count on being given the hard-sell to schedule a follow-up session.

The most overlooked strategy for creating tax-free income from your taxable investments

Another bullet point on topics that will be covered. This sounds great! Wow!

OK back to reality. Remember the adage if it sounds too good to be true it probably is? Well this sounds like it fits.

Again I have no idea what they will be saying but if this was some super-secret sophisticated tax strategy would they be sharing it with a group of non-screened attendees in a park district building for free?

The Bottom Line

I am not saying anyone is doing anything fraudulent, illegal or untoward. What I am saying is that this appears to be nothing but a thinly veiled sales pitch by an accounting firm and a financial services firm to pique your interest and to ultimately sell you some sort of life insurance policy, annuity or some other financial product with hefty commissions attached. I’m guessing the accounting firm has some arrangement to realize a portion of the product sales arising from session attendees.

I’m not against learning and improving your financial knowledge. In fact that’s why I started this blog and why I write for Investopedia, Go Banking Rates and elsewhere. If you go to one of these seminars go with a very skeptical attitude, listen hard and be non-committal about your interest when they urge you to schedule a follow-up meeting. Go home afterwards and at least research the ideas they are touting and the firms involved. Be a smart consumer of financial products and advice. That is the best way to protect yourself from financial fraud and from buying expensive financial products that serve someone else’s needs better than they serve yours.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out our resources page as well.

Should You Wait Until Age 70 to Collect Social Security?

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This post was written by financial planner Daniel Zajac. 

The decision to start or delay Social Security is a big one, one that may materially impact retirement success or failure. Because it is so important to retirement success, it bothers me when I hear soon-to-be retirees say they are going to take Social Security benefits early.  It also bothers me when they take Social Security benefits at full retirement age without considering the alternatives.

Perplexed? Stay with me.

I know what you’re thinking: “Why wouldn’t a financial advisor be okay with someone taking Social Security benefits at full retirement age?”

It’s not that I’m never okay with starting Social Security early or at full retirement age, I’d just want to make sure they take their benefits for the right reasons and do the right research into all the available options.  When it comes to Social Security benefits, there’s a lot of money to be left on the table if you don’t know what you’re doing (or if you decide to collect at any age, “just because”).

Plan A: Wait Until Age 70 to Collect Social Security Benefits

The Social Security Administration explains that full retirement age “is the age at which a person may first become entitled to full or unreduced retirement benefits.”

(Specifically, your full retirement age depends on your birth year. Someone born in 1940 has a full retirement age of 65 and 6 months. Someone born in 1960 has a full retirement age of 67. Waiting until age 70 to collect Social Security benefits shouldn’t feel like that long of a wait.)

Unfortunately, a little digging is required to realize that even if you take full benefits at your full retirement age, you won’t get the maximum Social Security available per month.  The maximum benefit is reached at age 70.

So why wait until age 70 if you can start earlier in the first place?  You’ll get an 8% increase in your benefits per year.  For example, let’s assume your full retirement age is 66 and you are to receive $2,000 per month.  If you wait until age 67 to collect (1 year), you will receive $2,160 per month, 8% more.

Now, when is the last time you heard of an 8% rate of return? That’s difficult to find. Better yet, it’s government backed. If you think you’re going to live a long time and you don’t need the money right now, “Plan A” may be the right plan for you.

But the 8% isn’t the only reason:

  • Get paid a higher amount for life. Generally speaking, people are living longer.  The longer people live, the more years they spend in retirement and the greater the chance of running out of money.  Optimizing Social Security to produce the highest monthly income could be a prudent, cost of living adjusted hedge against living too long.
  • You can take a spousal benefit. Spouses have more options for collecting Social Security.  If you are married, you can optimize your total income from Social Security by strategically taking a restricted spousal benefit and waiting until age 70 to collect your own benefit.

If you can afford it, waiting until you reach age 70 may be your best option to receive Social Security benefits – your benefits will max out at that age.

Plan B: Take Social Security Benefits at Your Full Retirement Age

Many people go with “Plan B.” They choose to because they don’t want to wait any longer.  They have paid into the system for many years and want to start collecting what is due to them.  However, by starting at full retirement age, they’re losing out on all the benefits I mentioned above. Even still, there are reasons to take Social Security benefits at your full retirement age.

If you’re at full retirement age, are strapped for cash, don’t have any other potential income sources, and are unhealthy, it may be reasonable to start your benefits.

However, before you start collecting at your full retirement age, I advise you to consider the alternatives.  Consider funding your retirement expenses through your savings while deferring Social Security.  Or, if you’re able, work a few years longer.  Retirement doesn’t have to occur at a certain age. Many choose to work well beyond their full retirement age. There may be many potential benefits that come with work, including continued socialization and better health – in some occupations.

For those who plan to work and collect Social Security, your full retirement age is the age at which you can collect your benefit and not receive a reduction for earned income.  Prior to your full retirement age, you may receive a reduction in your benefit if you collect Social Security and work (you can make up to $15,720 per year in 2015 prior to your full retirement age and not receive a reduction of income).

Before you apply for benefits, use the Social Security Retirement Estimator to get a feel for how much you’ll receive.

Plan C: Take Social Security Benefits Before Your Full Retirement Age

When you take Social Security benefits before your full retirement age, your monthly benefit will be reduced. For example, if your full retirement age is 66 – at which you’d receive $1,000 per month – and you choose to start receiving benefits at age 62, your monthly benefit will be reduced by 25% to $750 per month.

That’s quite a drop in benefits. I love Social Security, but I wouldn’t choose this plan without good reason.

Are there times when it would be reasonable to go with this plan? Of course. For example, you might be working in a job that is physically demanding and bad for your health. In this case, it might be more reasonable to quit your job and take Social Security benefits than to suffer a possible heart attack from overexertion.

Which Plan is Right for You?

This is by no means a complete list of the available options to you as a retiree.  It is, however, a quick review of several advantages and disadvantages of oft chosen plans.  As you progress through your 60s, it will become more clear which plan is right for you. However, the ultimate clarity can be derived via a detailed analysis of your total financial plan including other income, assets, and taxes.

Consider seeking the help of a financial advisor if you’re having trouble sorting through your options. Make sure your family is on board with your decisions. Seek wise counsel before you decide to retire. With a little help from those around you, you can find the confidence you need to make the right decision.

None of the information in this document should be considered as tax advice.  You should consult your tax advisor for information concerning your individual situation.

Daniel Zajac, CFP®, AIF®, CLU®, is a Partner and Financial Advisor with Simone Zajac Wealth Management Group based in the Philadelphia, PA area. As a 33-year-old veteran of the financial planning industry, Daniel loves to share his financial expertise with the masses at FinanceandFlipFlops.com. There, he explores the ins and outs of topics such as life insurance, investing, retirement planning, and much more.

Advisory services offered through Capital Analysts or Lincoln Investment, Registered Investment Advisors.  Securities offered through Lincoln Investment, Broker Dealer, Member FINRA/SIPC   www.lincolninvestment.com

Simone Zajac Wealth Management Group, and the above firms are independent, non-affiliated entities.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner.

7 Retirement Savings Tips to Help Avoid Regret

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According to TIAA-CREF’s Ready to Retire Survey “…more than half of people approaching retirement (52 percent) say they wish they had started saving for the future sooner.”    Some key findings from the survey include:

  • “Many respondents say they wish they had made smarter financial decisions earlier in their career, including saving more of their paycheck (47 percent) and investing their savings more aggressively (34 percent).
  • Forty-five percent of participants age 55-64 say financial readiness is the most important factor in determining when they will retire, but only 35 percent say they saved in an IRA or met with a financial advisor.
  • By not making the most of these options, many Americans now feel uncertain about their financial futures, with 68 percent of those approaching retirement saying they are not prepared for what’s to come
  • These retirement savings challenges are causing Americans to reconsider their vision of retirement. Forty-two percent of survey respondents age 55-64 say they plan on working in a part-time job, and 39 percent say they’ll be more conservative about how much they spend on entertainment and other luxuries.” 

Here are 7 retirement savings tips to help you avoid regret as you approach retirement. 

Start early 

If you are just starting out in the workplace, enroll in your employer’s 401(k), 403(b), or whatever type of retirement plan they offer.  Contribute as much as you can.  If there is a match try to contribute at least enough to earn the full matching contribution from your employer, this is free money.  There is no greater ally for retirement savers than time and the magic of compounding.  As tough as it may be to save early in your career put away as much as you can reasonably afford as early as you can afford it.

Increase your contributions 

The maximum 401(k) contribution limits for 2015 are $18,000 and $24,000 for those 50 or over at any point in the year.  No matter what you are currently contributing to your plan try to increase it a bit each year.  If you are currently deferring 3% of your salary bump that to 4% or even 5% next year.  Increase a bit more the following year.  You won’t miss the money and every bit can help fund a comfortable retirement.

Start a self-employed retirement plan 

If during the course of your career you become self-employed it is still important that you save for retirement.  Starting a plan such as a SEP or Solo 401(k) can be a great way for you to put away money for retirement.  You work hard at your own business and you deserve a comfortable retirement.

Contribute to an IRA 

Anyone can contribute to an IRA.  Traditional IRAs are subject to income limits as far as the ability to make pre-tax contributions, but anyone can contribute on an after-tax basis with no income limits.  All investment gains grow tax-deferred you do need to keep track of any post-tax contributions however.  Roth IRAs can also be a good alternative; again there are income ceilings that can limit your ability to contribute.

Don’t ignore old retirement accounts 

Today it isn’t uncommon for people to have worked for five or more employers during their career.  It is important that you make an affirmative decision as to what you with your old 401(k) or other retirement account when you leave your employer.  Leave it where it is, roll it to an IRA, or to your new employer’s plan (if allowed) but don’t ignore this money.  Even smaller balances can add up especially if you have several such accounts scattered about.

By the same token make sure that you stay on top of any pensions that you might be eligible for from old employers.  Make sure these companies can find you and be sure to carefully evaluate any pension buyout offers you might receive from old employers.  These can often be a good deal for you.

Beware of toxic rollovers 

Recently I have read a number of accounts about brokers and registered reps looking for employees of large organizations and convincing them to roll their retirement accounts into questionable investments with their brokerage firms.  Certainly rolling your 401(k) into an IRA via a trusted financial advisor is a valid strategy but like anything else you need to vet the person suggesting the rollover and the investment strategy they are suggesting.

Avoid high cost financial products

Many financial advisors who make all or part of their income from the sale of financial products will often suggest high cost financial products to implement their financial recommendations.  These might include annuities, certain mutual funds, non-traded REITs, and others.  Be leery and ask about the costs and fees associated with these products.  There is nothing wrong with annuities, but many of them that are pushed by registered reps carry excessive fees and have onerous surrender charges.

In the case of mutual funds, index funds are not the end all be all.  But you should certainly ask the advisor why the large cap actively managed fund with an expense ratio of 1.25% or more that they are suggesting is a better idea than an index fund with an expense ratio of 0.15% or less.

At the end of the day starting early, investing wisely and consistently, and being careful with your retirement savings are excellent ways to avoid the regrets expressed by many of those surveyed by TIAA-CREF.

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Financial Independence or Retirement – Which is the Better Goal?

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This is a post by author and financial journalist Jonathan Chevreau.  Jon is at the forefront of a movement he calls “Findependence.”  This is essentially looking at becoming financially independent so that you can pursue the lifestyle of your choosing.  This may be a form of semi-retirement, but the point is to work because you want to, not so much because you have to. Findependence is a process and a journey rather than a big financial event like the traditional concept of retirement.  I agree with Jon’s views on this issue.  Jon is the author of the book Findependence Day, be sure to check out his new site Financial Independence Hub.  

One of the problems with selling the concept of Retirement to young people is that old age just seems so impossibly far away in the distant future. The financial services industry and the mass media love to talk about retirement but let’s face it, if you’re a recent college graduate just entering the workforce, retirement is perceived as something far far in the future, just one step before the equally remote prospect of death. 

Findependence far more accessible for the young than Retirement

The pity is there’s a much better term that could be substituted for Retirement. It’s called Financial Independence or what I’ve dubbed “Findependence.” (simply a contraction of the two words.)

Financial independence is a goal that can be achieved not 30 or 40 years from now but in 10 or 15 years. It’s not unreasonable for a 25 year old just taking their first step on the career ladder and embarking on marriage, family formation and home ownership to set a goal of financial independence (or “Findependence”) by the time they’re age 40. 

Findependence is not synonymous with Retirement

Does that mean “early retirement” at such a tender age? No, because Findependence is not synonymous with Retirement. Most of us know what Retirement is but for a refresher course on Financial Independence, go to Wikipedia and search the term Financial Independence. You’ll find an entry which is simple enough to grasp: financial independence is the state of being able to have enough financial wealth to live “without having to work actively for basic necessities.”

If you’re findependent, your assets generate income greater than your expenses. Note that Findependence is not correlated with age. If you have modest means and have been frugal enough to build up a nest egg in 10 or 15 years, you may well be “findependent” by age 40 or so. Conversely, if you’re a high-earning high-spending professional who requires hundreds of thousands of dollars of income a year, findependence may not be in your grasp even by the traditional age of retirement.

You can see why people often confuse the terms since two ways of generating passive income is often employer pensions and Social Security or other pensions paid by governments. These particular income sources do not begin until one’s late 50s or 60s. But again, if your needs are modest, you might well be able to establish early findependence solely with a portfolio of dividend-paying stocks, perhaps supplemented by part-time jobs or freelance work. 

Boomertirement

For baby boomers, the so-called “New Retirement” will often prove to be a variant of Findependence and traditional Retirement. Very few boomers, even if they have the financial means, will embrace the traditional “full-stop” retirement of their parents who enjoyed Defined Benefit pension plans. The older generation may have experienced the gold watch and a quarter century of golf, bridge, reading but boomers are much more likely to embrace a semi-retirement that consists partly of employer pensions, supplemented by government pensions, taxable investment income and part-time employment income, and perhaps the fruits of certain creative endeavors: royalties from literary or musical creations, licensing fees from various entrepreneurial ventures, fees from serving as corporate directors and other sources of income. 

Jonathan Chevreau is a financial journalist and author.  He is the author of the book  Findependence Day.   The original version of this post appeared on his new site Financial Independence Hub.  Jon is a must follow on Twitter

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner.